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Record of
Decision 2018/19
Tariff Application by the National Ports Authority for the Tariff Years 2018/19-2020/21
On 1 August 2017, the National Ports Authority (the NPA) applied to the Ports Regulator of
South Africa (the Ports Regulator) in terms of Section 72 of the National Ports Act, 12 of
2005 (the Act) for approval of the tariffs for services and facilities offered by the NPA of an
average of 8.45% increase for the period 1 April 2018 to 31 March 2019, together with
indicative tariffs for the periods 1 April 2019 to 31 March 2020 and 1 April 2020 to 31 March
2021.
After considering the application and the submissions by all stakeholders during the
consultation period, and based on latest available data, the Ports Regulator has concluded
that an appropriate overall increase in average tariffs for the financial year 2018/19 is 2.5%.
The Ports Regulator further concluded that all cargo dues for 2018/19 are to increase by
5.4%, except for marine services and related tariffs (Sections 1-8 of the Tariff Book, excluding
Section 7 that deals with cargo dues) that are to increase by 8.5%, export bulk coal cargo
dues that are to increase by 8.5% and container and all RoRo cargo dues tariffs are to remain
unchanged at 2017/18 levels. All break-bulk cargo dues are to be capped at R100/ton.
In line with previous years’ decision, all marine tariffs (Sections 1-8 of the Tariff Book,
excluding Section 7 that deals with cargo dues) for existing commercial South African
flagged vessels as well as commercial vessels registered in South Africa in 2016/17 will
receive a 30% discount applicable year on year up to 31 March 2019. Vessels registered in
South Africa in 2017/18 will receive a 20% discount up to 31 March 2019 and similarly a
vessel registered in 2018/19 will receive a 10% discount up to 31 March 2019. The discount
will hereafter be reviewed.
In line with the Multi-Year Tariff Manual of March 2017 the Ports Regulator projects that
the indicative overall average tariff adjustment for the 2019/20 and 2020/21 tariff years will
be within the 6% inflation target band.
Page 2 of 21
Record of Decision for Tariff Year 2018/19
1. The Tariff Application
The National Ports Authority (NPA) requested an average tariff increase of 8.45% for the
2018/19 tariff year. In addition, and in line with the revised Tariff Manual, the NPA has applied
for an indicative average tariff of 24.82% and 2.09% for 2019/20 and 2020/21 respectively.
This follows an application for 2017/18 of 8.02% after which the Regulator, considering
updated information approved a 4.8% average tariff increase. A revised tariff application was
submitted on the 19th of October 2017 to correct an error contained in the original 1 August
2017 application. The revised submission by the Authority again requested a tariff increase of
8.45%, however with a larger drawdown of R346 million from the Excessive Tariff Increase
Margin Credit.
Table 1: Overview of NPA Tariff Application and Previous Decisions (R million as applicable)
Year Previous Year 17/18 Current Tariff Application
WACC Tariff Application ROD 18/19 19/20 20/21
Risk-free rate (nominal) 8.58% 8.58% 8.33% 8.33% 8.33%
Real risk free rate 2.05% 3.46% 2.78% 3.07% 2.88%
MRP 5.40% 5.40% 5.30% 5.30% 5.30%
Asset Beta 0.50 0.50 0.50 0.50 0.50
Equity Beta (using Hamada) 0.86 0.86 0.86 0.86 0.86
Gearing 0.5 0.5 0.5 0.5 0.5
Debt/equity ratio 100% 100% 100% 100% 100%
Cost of Debt 10.81% 9.68% 10.79% 10.79% 10.79%
Inflation forecast 6.40% 6.10% 5.40% 5.10% 5.30%
Tax rate 28.00% 28.00% 28.00% 28.00% 28.00%
Real Vanilla WACC 5.42% 5.42% 6.23% 6.52% 6.32%
Revenue Requirements Calculation
Return on Asset 4 037 4 417 5 020 5 660 5 988
Depreciation 2 015 2 031 2 166 2 333 2545
OPEX 5 961 5 961 5 938 6 258 6 616
Tax 969 1 050 1 150 1 288 1 370
Total 12982 13459 14274 15539 16519
Claw- back -774 -681 -1 531 106 -
ETIMC -98 -593 -81 - -
Allowable Revenue 12 110 12 185 12 662 15645 16519
Y/Y growth 9.0% 22.93% 10.87%
Real Estate -2 798 -2 798 -3 025 -3 279 -3 542
Marine Business Income 9 312 9 387 9 637 12366 12977
Prior year's Revenue 8 469 8 759 8 469
Volume Increase 1.8% 2.97% 2.79% 2.79% 2.79%
Average Price Increase Required 8.02% 5.97% 8.45% 24.82% 2.09%
2. The Ports Regulator’s Mandate
Page 3 of 21
Record of Decision for Tariff Year 2018/19
In considering the Applicant’s proposed tariffs, the Ports Regulator was guided by the National
Ports Act, 12 of 2005, the Regulations issued in terms of Section 80(1) of the Act, together
with the Directives1 and the Regulatory Tariff Manual applicable to the period up to 2020/21
(the manual) (hereinafter jointly referred to as the ‘Regulatory Framework’).
Further, the Ports Regulator considered the submissions contained in the Application and all
subsequent submissions, written and oral comments, received in the consultation process,
including the responses thereto, as well as its own information and research. It must be noted
that the information at the disposal of the Ports Regulator postdates the Application and as
such some differences in calculation are due to the updating of data and forecasts.
3. The Methodology
In order to continuously improve the level of transparency and consistency in the tariff setting
process, the Ports Regulator has since its establishment, undertaken extensive consultations
with all port stakeholders, including the NPA, through consultation hearings (road shows),
meetings, and the receipt of submissions, on the NPA’s proposed Tariff Methodology. This
mandated interim methodology, published on 13 August 2013, was applicable to the 2014/15
tariff year. Subsequently the first multi-year tariff methodology, applicable to the tariff period
2015/16-2017/18, was published in August 2014 and thereafter the second multi-year tariff
methodology applicable to the 2018/19-20/21 tariff years was published in March 2017
The guidelines within the Tariff Methodology/Manual were aimed at assisting the NPA with
submitting an application with a three-year view that will provide greater certainty to the NPA
in its investment decisions and the ports sector as a whole. In addition, it assisted stakeholders
in formulating responses to the application which assisted the Ports Regulator in decision-
making. The publication of the methodology increased transparency, accountability, as well
as regulatory certainty.
The approach encapsulated by the Tariff Manual is based on the Revenue Required (RR)
approach. The Ports Regulator, while attempting to increase regulatory certainty, must retain
a degree of regulatory discretion to respond to unforeseen economic or other events, as well
as corrections, anomalies and unintended consequences of a strict and autonomic application
of the methodology that may impact on the sustainability of the South African ports system.
This has been captured in the guidelines and taken into consideration. In the evolution of ports
regulatory architecture from the interim methodology to the second multi-year methodology,
changes and future provisions have been made in the approach to, and calculation of various
items, specifically with regards to the methodology for determining the Market Risk Premium
as well as the calculation of Depreciation in the previous year, and a stricter interpretation
with regard to the treatment of divisional taxation has been implemented in this assessment
of the NPAs Tariff Application. In addition provisions dealing with performance incentives
(WEGO), as well as the valuation of assets are under development for implementation in
future tariff years.
1 The Directives were promulgated in terms of Section 30(3) of the Act in Government Notice 825, Gazette No. 32480 dated 6 August 2009,
and as amended in the Directives Amendment Notice, promulgated in Government Notice 37, Gazette No. 32898 on 29 January 2010.
Page 4 of 21
Record of Decision for Tariff Year 2018/19
The NPA used the Tariff Manual to calculate and submit the application as set out below:
𝑹𝒆𝒗𝒆𝒏𝒖𝒆 𝐑𝐞𝐪𝐮𝐢𝐫𝐞𝐦𝐞𝐧𝐭
= 𝑅𝑒𝑔𝑢𝑙𝑎𝑡𝑜𝑟𝑦 𝐴𝑠𝑠𝑒𝑡 𝐵𝑎𝑠𝑒 (𝑅𝐴𝐵)
× 𝑊𝑒𝑖𝑔ℎ𝑡𝑒𝑑 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐶𝑜𝑠𝑡 𝑜𝑓 𝐶𝑎𝑝𝑖𝑡𝑎𝑙 (𝑊𝐴𝐶𝐶) + 𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝐶𝑜𝑠𝑡𝑠
+ 𝐷𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛 + 𝑇𝑎𝑥𝑎𝑡𝑖𝑜𝑛 𝐸𝑥𝑝𝑒𝑛𝑠𝑒 ± 𝐶𝑙𝑎𝑤𝑏𝑎𝑐𝑘
± 𝐸𝑥𝑐𝑒𝑠𝑠𝑖𝑣𝑒 𝑇𝑎𝑟𝑖𝑓𝑓 𝐼𝑛𝑐𝑟𝑒𝑎𝑠𝑒 𝑀𝑎𝑟𝑔𝑖𝑛 𝐶𝑟𝑒𝑑𝑖𝑡 (𝐸𝑇𝐼𝑀𝐶) ± 𝑊𝐸𝐺𝑂
4. Compliance with the Directives, Regulations and National Ports Act
Although the Application achieved formal compliance with the Act, Regulations, Directives
and the Manual, components of the Application do not yet fully comply as there has not been
full disclosure. The data was adequate for purposes of calculating the over/under-recovery.
However, the requirement of the Ports Regulator, as articulated in the 2011/12 Record of
Decision, is that full disclosure is required for all NPA business; that is, both marine and real
estate business as well as a port by port differentiation of revenues and costs. The Ports
Regulator’s view on this matter has not changed, although a higher level of compliance has
been achieved compared to previous years, future applications must include disaggregated
information on all elements of the NPAs business.
The Applicant submitted its Tariff Application based on the Rate of Return methodology, as
outlined in the Manual (the ‘Revenue Requirement’ approach). The Ports Regulator therefore
decided to accept, in this Application, the general methodology that has been used by the
Applicant in this instance; however, in some of the parameters, the Ports Regulator differed
from the Applicant with respect to either the methodology or its application.
Further important key areas include: -
Directive 22(3)(a) requires that the NPA shall set out the manner in which the tariffs have been
calculated, and the model used by the NPA for determining and calculating the tariffs. This
has been fully complied with in this Application.
Directive 22(3)(b) requires that all operating costs, expenses and revenues incurred or
generated from a port service or port facility, as well as the value of the capital stock related
to such services or facilities, are to be declared in the Application. Greater disclosure than in
previous applications was apparent, including the submission of confidential data, allowing
the Ports Regulator to conduct a more thorough assessment.
The CAPEX programme information provided by the Applicant was sufficiently detailed to
make an assessment. As the CAPEX information is the subject of further extensive processes
that are to be engaged by the Ports Consultative Committees (PCC) and the National Ports
Consultative Committee (NPCC), the Ports Regulator accepts the information provided for the
purposes of this tariff application as an outcome of the PCC and NPCC processes, as well as a
higher level of compliance by the Applicant. In this regard, continued information
requirements, as set out in Item 8 of the 2015/16 ROD and Section 7 of this ROD, will continue
to apply on a quarterly basis.
Page 5 of 21
Record of Decision for Tariff Year 2018/19
Directive 22(3)(c) requires that the amounts to be invested and revenues that are to be
utilised in port development, safety, security and environmental protection, must be
provided, as well as (i) the manner in which the tariffs will affect the cost of doing business in
the ports; and (ii) the proposed profit margin or rate of return, together with the motivation
to show why this margin or return is commensurate with risk.
The safety, security and environmental expenditure submitted were more detailed than in
past applications; the Application, in line with the methodology as set out in the Regulatory
Manual, fully complied with 22(3)(c)(ii).
Directive 22(6) requires that the NPA shall maintain such accounting and financial systems
necessary to provide the Ports Regulator with sufficient information to verify the pricing
principles and models used by the NPA to calculate tariffs.
The generalised corporate level of information, including audited financial statements, was
adequate for the purposes of the analysis. Furthermore, the credibility of the information
provided has continued to increase markedly over the tariff periods. Notwithstanding that the
generalised corporate level information was adequate, greater breakdown of cost and
revenue information on port and activity levels will be required in future for tariffs to be more
accurately cost reflective.
Directive 23 (1): In considering the proposed tariffs in terms of Directive 22, the Regulator must
have regard to whether the proposed tariffs reflect and balance the following considerations:
-
(a) A systematic tariff methodology that is applicable on a consistent and comparable basis;
The Applicant has submitted the Tariff Application based on the requirements set out in the
Regulatory Manual.
(b) fairness.
Whilst the tariff structure in the South African port system does not currently reflect
international best practice with regards to the allocation of costs, it is the focus of the Tariff
Strategy, published on the 31st of July 2015 with implementation to commence on 1 April
2017. By the reductions and increases granted in this and previous tariff determinations, the
Ports Regulator attempts to address some of the most glaring of these imperfections;
however, the full implementation of the tariff strategy will give effect to Directive 23(1)(b)
more comprehensively.
(c) The avoidance of discrimination, save where discrimination is in the public interest;
By the reductions and increases (differentiated pricing) approved by the Ports Regulator in
this ROD, as well as previous determinations, the Ports Regulator continues to address this.
See comment on Directive 23(1)(b) above.
(d) Simplicity and Transparency;
The NPA have made significant strides in improving their levels of transparency. The
requirement has been met.
(e) Predictability and stability;
Page 6 of 21
Record of Decision for Tariff Year 2018/19
The application matches previous forecasts in numerous aspects. This requirement has been
met.
(f) the avoidance of cross-subsidisation save where cross subsidisation is in the public
interest; and
The Tariff Strategy has set out the manner in which cross subsidisation will be addressed. The
Regulator will continue to guide the NPA in this regard, including the introduction of a Port
Tariff Incentive Programme (PTIP) which sets out a framework for the application and
approval of cross-subsidies and the level thereof that would be considered to be affordable
and in the public interest.
(g) The promotion of access to ports and efficient and effective management and operations
in ports.
The information provided in the application was not sufficient to determine compliance with
this provision. Although this is not clearly stated in the Application, the internal processes of
the Applicant, including the Section 56 and 57 processes in terms of the Act and the processes
that the Applicant is undergoing in the PCCs, address some, but not all, of the concerns that
arise under this provision. The other issues that remain outstanding will be addressed in the
disclosure components of the Regulatory Manual referred to above, as well as in the Ports
Regulator’s compliance and monitoring processes. In this regard, Item 12 outlines future
information reporting requirements by the NPA to the Ports Regulator.
Page 7 of 21
Record of Decision for Tariff Year 2018/19
5. The Application Specifics
The Application submitted is based on the Required Revenue methodology. The Ports
Regulator assessed the Application on this basis, and used the methodology outlined in the
Regulatory Manual, except where the Manual was incorrectly applied; or in the opinion of the
Ports Regulator, a deviation was necessary.
In effect, the NPA used the following formula in its calculations for the Required Revenue:
Revenue Requirement = (cost of capital x Regulatory Asset Base (RAB) + operating costs +
depreciation + taxation expense ± claw-back ±ETIMC
This approach accords with rate-of-return revenue requirement calculations by Regulators in
South Africa and internationally (as modified in the ports regulatory practice over time) and
has been used as the basis for assessments by the Ports Regulator in the preceding
applications.
The standard exposition is:
RR = (v – d + w) r + D + E + T +/- C +/-ETIMC +/-WEGO
Where:
RR = Revenue Requirement
v = value of the assets used in the regulated services
d = accumulated depreciation on such assets
w = working capital
r = return on the capital reasonably expected
D = depreciation accounted for in the period of the tariff
E = operating expenses
T = taxation expense
C = Claw-back
ETIMC = Excessive Tariff Increase Margin Credit
WEGO = Weighted Efficiency Gains from Operations
(v – d + w) = Regulatory Asset Base
6. The Regulated Asset Base (RAB)
Page 8 of 21
Record of Decision for Tariff Year 2018/19
The RAB submitted by the NPA was as follows:
Table 2: NPA Regulatory Asset Base Calculation (R million)
6.1. RAB determined by the Ports Regulator
In the previous tariff determinations, the Ports Regulator accepted the Depreciated Optimised
Replacement Cost (DORC) method used by the Applicant to determine a starting Regulatory
Asset Base. The Ports Regulator maintains it previous position in that it retains a low level of
confidence in the RAB value as determined by the 2008 DORC conducted by the NPA as the
process gave rise to a steep increase in asset values. However, regulatory certainty was
required in the absence of any alternative and the RAB was therefore accepted. The Ports
Regulator has commenced a process to assess the application and appropriateness of these
valuations for major assets in order to inform subsequent assessments of the RAB.
The Ports Regulator has previously determined that the 2010/11 ROD value establishes the
starting point for trending the RAB in future tariff determinations. Nonetheless, the Ports
Regulator has applied a number of adjustments (correcting the actual CAPEX resulted
adjustments) for the subsequent years, to arrive at an opening balance for the 2018/19 year
of R80 241 million.
The RAB value for the period under review was determined using the following formulae:
𝑹𝑨𝑩𝒚 =𝟏
𝟐[𝑹𝑨𝑩𝒄,𝒚 + 𝑹𝑨𝑩𝒐,𝒚] + 𝒘𝒚
𝑹𝑨𝑩𝒄,𝒚 = 𝑹𝑨𝑩𝒐.𝒚(𝟏 + 𝑪𝑷𝑰𝒀) + 𝑪𝑾𝑰𝑷𝒀 − 𝑫𝒚
Where:
RAB y = value of the RAB used to determine the returns for the
period y;
𝑅𝐴𝐵𝑜,𝑦 = opening value of RAB for the period y;
RAB Elements ROD NPA Tariff Application
2017/18 2018/19 2019/20
Opening RAB Value 77 365 80 766 85 625
RAB trended 76 235 85 210 90 506
Add Capex 3 055 3053 7 377
Less Depreciation -1 948 -2166 -2 355
Closing RAB value 78 134 86 097 95 528
Average Opening and Closing 74 773 83 432 90 577
Less Working Capital -927 -2 799 -1 374
RAB Final 73 846 80 633 89 203
Page 9 of 21
Record of Decision for Tariff Year 2018/19
𝑅𝐴𝐵𝑐,𝑦 = closing value of RAB for the period y;
𝑤𝑦 = forecast average net working capital over the review period;
𝐶𝑊𝐼𝑃𝑌 = value of expected capital investment over the review period;
𝐷𝑦 = depreciation allowance for assets over the review period;
𝐶𝑃𝐼𝑌 = annual rate of general inflation expected over the review
period
The calculation of depreciation resulted in a depreciation allowance of R 2099 million as
opposed to the NPAs application of R2 166 million. Depreciation calculated by the Ports
Regulator for the outer years total R2 276 and R2 481 million respectively.
Based on previous tariff assessments and adjustments thereto, information in the Application
and the Ports Regulator decisions for the current application as well as application of the
above equations, the RAB is as per the Table below:
Table 3: Regulatory Assessment of the Regulatory Asset Base (R million)
FY 2018/19 RAB
Opening Net Book Value 80 241
Indexing 4 415
Less: Depreciation -2 099
Add: CAPEX 3 053
Closing NBV 85 610
Average Opening and Closing 82 962
Less: Working Capital -2 452
RAB Final 80 474
6.2. Cost of Capital
The NPA’s Application follows the Capital Asset Pricing Methodology (CAPM) in order to
determine the cost of capital, as per the requirements of the Regulatory Manual. The
Applicant has utilised the Vanilla Weighted Average Cost of Capital (WACC) approach in line
with the methodology. Furthermore, the Application requested the real vanilla WACC be
assessed as being 6.23% for 2018/19, and 6.52% and 6.32% respectively for the following
years.
The Ports Regulator has determined the real vanilla WACC be 6.38% when applying its
determinations to the elements below. Furthermore, the Ports Regulator has determined
provisional WACC variables for the outer years to be 5.90% and 5.93% respectively. The
differences can mainly be ascribed to the inclusion of an “equitable” tax rate on a 5 year
average basis in order to reduce the future differentials on the claw back.
The formula for calculating the WACC under the CAPM is as follows:
𝑾𝑨𝑪𝑪𝒗𝒂𝒏𝒊𝒍𝒍𝒂 = 𝒌𝒅. 𝒈 + 𝒌𝒆(𝟏 − 𝒈)
Page 10 of 21
Record of Decision for Tariff Year 2018/19
Where:
𝑘𝑑 = pre-tax cost of debt
𝑘𝑒 = post tax cost of equity
𝑔 = gearing, which is debt over total capital
6.2.1. Cost of Equity
The real post-tax cost of equity requested in the Application is 7.34%. The Ports Regulator has
determined that the real post-tax cost of equity be 7.73%, which was then used to determine
using the subsidiary elements listed below. This in turn has resulted in a total calculated return
on equity of R 3 090 million available to the NPA as profit/maximum dividend as opposed to
the R2 953 million requested.
The CAPM cost of equity methodology used by the Application is as follows:
𝒌𝒆 = 𝑹𝒇 + 𝜷(𝑴𝑹 − 𝑹𝒇)
Where:
ek = cost of equity
fR = risk free rate
MR = market return
(𝑀𝑅 − 𝑅𝑓) = Market Risk Premium calculated over long term
= beta coefficient
6.2.2. Risk Free Rate
The methodology stipulates that the South African Reserve Bank’s published time series
KBP2003M “Yield on loan stock traded on the stock exchange: Government bonds - ten years
and over” in order to avoid anomalies in single data series bond as an appropriate measure of
the RFR, and is seen to adequately reflects the market’s perception of sovereign risk and
inflation over the regulatory period. The average RFR is calculated as a monthly average over a
five-year period.
The RFR used in the NPA 2018/19 application is a nominal number of 8.32%.
The latest data available to the Regulator is from October 2017, with an average five-year
period commencing in August 2012. The resultant nominal risk free rate is 8.35%.
6.2.3. Beta Co-efficient
The Ports Regulator used an asset beta of 0.5, as set out in the Regulatory Manual, which
equates to an equity beta of 0.93. The Hamada equation was used to re-lever the beta. And
the “equitable tax rate” of the long term average (5 years) was used, as opposed to the
Page 11 of 21
Record of Decision for Tariff Year 2018/19
corporate tax rate of 28%. See section 6.5 on taxation. This also resulted in a higher calculated
return on equity than that applied for by the NPA.
6.2.4. Market Risk Premium
The Ports Regulator, in line with regulatory consistency, and the medium-term tariff
methodology, has calculated a market risk premium of 5.3%, as published in the latest
available Dimson, Marsh and Staunton (DMS). It is an estimate of the geometric mean MRP as
measured against bonds for South Africa to determine an MRP for the NPA’s cost of equity.
6.2.5. Gearing
As set out in the Regulatory Manual, the Ports Regulator in its assessment has used a Gearing
of 0.5.
6.2.6. Cost of Debt
The Ports Regulator calculated the real Cost of Debt (Pre-tax) to be 5.02%.
6.2.7. Inflation
The National Treasury inflation forecast, as per the Medium Term Budget Policy statement
October 2017 for the period was used, viz. 5.4% for 2018/19, 5.5% for 2019/20, and 5.5% for
2020/21.
6.3. Operating Costs
The Ports Regulator accepted the operating cost estimate for 2016/17. However, the Ports
Regulator wishes to express its concern regarding the impact of continued under spending of
CAPEX. Whilst the underspending on maintenance has narrowed over the last few years,
continued capex under-expenditure impacts on efficiencies, as well as capacity requirements
and service delivery and remains a concern. Whilst some of the underspending on operational
expenditure is as a result of cost savings and higher operational and management efficiency,
an apparent inability to implement projects will in the long run impact on the sustainability of
the ports system. The Ports Regulator will further address any over allowance on operational
expenses through the claw-back mechanism in the next tariff year.
The NPAs total operational cost amounts to R5 938 million, including Group overhead costs
relating to the NPA. The split of costs into different operations of the NPAs business, such as
marine costs and lighthouse costs per port, has not been provided. Whilst the Port Regulator
analysed the operational expenditure of the NPA in detail, any under spending during the tariff
period under consideration will, as per existing practice, be clawed back; whilst any over run
on costs must be motivated in detail.
The Ports Regulator allowed the inclusion of the R629 million Group Costs in the total allowed
expenses, subject to the conditions in the Manual. Whilst the Ports Regulator allows the
Group cost component on the basis that the NPA, as a division of Transnet, will continue to
depend on centralised services, the Ports Regulator will continue to monitor this allowance
Page 12 of 21
Record of Decision for Tariff Year 2018/19
and claw back any under spending that may occur, or unfair loading to the detriment of port
users.
Specifically, with regards to the Group cost component of the NPAs operational expenses, the
Ports Regulator considered the following in allowing the request: Was the allocation from the
NPA to Group in terms of the applicable policy? The Ports Regulator deemed it to comply with
the policy as submitted to the Ports Regulator. Are the share allocations in the policy a fair
reflection of the services rendered by the Group to the NPA? Based on available information,
the Ports Regulator is largely satisfied with the fairness of the share allocations in the policy.
However, the Ports Regulator will, in due course, address the applicability of some of the line
items in the policy, finding that further assessment is necessary; this will be addressed in a set
of regulatory accounts over the medium-term.
The Ports Regulator thus approves the Group cost allowance for 2018/19 and gives conditional
approval for the 2019/20-2020/21 tariff years based on the conditions set out in the
Regulatory Manual, which allow for future claw-back if deemed necessary.
6.4. Depreciation
The Regulator’s assessment has resulted in an allowance of R 2 099 million as a depreciation
allowance, as opposed to the applied for amount of R 2 015 million.
Estimated depreciation calculated by the Ports Regulator for the outer years totals R 2 221
and R2 441 million respectively.
6.5. Taxation Expense
It has been observed that a tax allowance of 28% on NPA profit as a part of the required
revenue calculation, has been disproportionately large as compared to the calculated 28% of
Transnet net profit, over the period of regulation of the NPA.
The continued revenue allowance of 28% of profit for NPA taxes can only be fair for a stand-
alone authority paying its taxes directly to SARS. For as long as the NPA remains one of the
profit making divisions of Transnet among other such divisions, an equitable tax rate for the
fair sharing of the group tax payable in any year has to be calculated proportionally for all
profit making divisions/segments/business units.
If the Transnet net profit is less than the sum of profits of profitable divisions or segments,
then the equitable tax rate will be less than 28%. If the Transnet net profit is equal to the sum
of profits of profitable divisions or segments, then the equitable tax rate will be 28% for all
divisions/ segments/business units.
The equitable tax rate is thus the rate which if applied to the profits of each profitable
segment, will amount, if added together, to the full 28% tax payable by the group to SARS on
its net profit in any one financial year.
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The calculation of the equitable tax rate (te) applicable to any profit-making division in any
financial year will thus be 28% x (Transnet net profit/ sum of profits of profitable divisions or
segments), ie:
𝑡𝑒 = 𝑡 ( 𝑃𝑔
∑ 𝑃𝑖)
Where:
te = equitable tax rate,
t = 28% or the corporate tax rate,
Pg = Transnet Group net profit for the year
∑ 𝑃𝑖 = Sum of profits of profitable divisions/segments/business units for the
year
Note that this calculation has nothing to do with deferred taxes or any other tax liability or tax
arrangement that the group has with SARS. The calculation of te only covers tax on net profit
for any one year applicable to profit making segments/divisions/business units.
The equitable tax rate will be applied by the Ports Regulator in its tax calculation (for the NPA
as a profitable division) in the revenue required model as the average equitable tax rate over
5 years and the clawback mechanism will be used to correct for the actual equitable tax rate
in any year when appropriate audited segmental financial statements become available. A 5
year average equitable tax rate of 15.80% was used in the calculations for the years 2017/18
and 2018/19, whilst the corrected “equitable tax rate of 14.06% was calculated for the
2016/17 tariff year and corrected through the claw back mechanism. The equitable tax rate
was also applied in the cost of equity (see section 6.2.3), resulting in this instance in a higher
return than what was applied for.
For any year under review, if a 28% taxation rate is allowed in the Revenue Requirement
calculation (instead of the 5 year average equitable rate), it may result in excessive volatility
in claw backs in future years. As such, the Ports Regulator has determined that the 5 year
moving average of the equitable tax rate be used and the claw back mechanism be used to
correct to the actual equitable tax rate in the following year when audited segmental financial
statements become available. The resultant taxation expense for 2018/19 is R 682 million
The calculation of the equitable tax rate is contingent on Transnet publishing (or providing the
Ports Regulator) audited segmental financials each year that shows the group net profit as
well as the profits and losses, costs and revenues, for each division/segment/business unit as
well as any adjustments. Failure to do this will result in the regulator not providing for taxation
in the revenue required calculation, and revenue required for tax will be deemed to be a part
of the allowed return on equity. Also see section 12 on information requirements.
6.6. Volume adjustments
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The Ports Regulator adjusted the volume forecast for the 2017/18 tariff year taking into
account the latest estimates available (including actual data for 7 of 12 months and latest
estimates for the full year) market assessments and intelligence. This resulted in a revised
tariff book revenue forecast of R8 893 million for 2017/18. This, as in the past, has included
the decision to exclude all bilateral contracts in the calculation of revenue. A volume based
revenue growth forecast of 3.05% was used for 2018/19, resulting in estimated tariff book
revenue for 2018/19 of R9 164 million, resulting therefore in an average tariff shortfall of
2.5%, which is the increase required.
6.7. Claw-back
As the 2016/17 tariff year is now complete, the Ports Regulator can make the final adjustments to the impacts of any forecasts and recoveries for that year, resulting in a revised total claw-back of R1 639 million.
Table 4: Claw-back Calculation (R million)
Claw Back calculations
Re-computed Revenue Requirement 2016/17 (adjusted for the equitable tax rate)
R'm
10 473
Less: Claw back taken (681)
Plus: ETIMC
Gross recomputed revenue 2016/17 9 792
NPA application 2016/17 AFS Revenue 11 307
Bilateral Agreements 124
2016/17 AFS Revenue (adjusted for bilateral Agreements) 11 431
Claw back FY 2016/17 (1 639)
Provisional allowed in ROD FY 2017/18 for 2016/17 (13)
Final Claw back FY 2016/17 (Adjusted in FY 2018/19) (1 652)
Estimated Claw back for 2017/18
Allowed Revenue per ROD FY 2017/18 (adjusted for equitable tax rate) 11 683
Latest Estimate Revenue 11 672
Estimated Claw back 11
50% Claw back Adjustment in FY 2016/17 6
Total Claw back due to customers FY2018/19
Claw back FY 2016/17 (1 652)
Return on Claw back FY 2016/17 (133)
Estimate FY 2017/18 6
Net Claw back FY 2018/19 (1 779)
Note: (-) indicates claw back to users (+) indicates claw back to NPA
An interim claw-back (in favour of the NPA) was made in the 2017/18 tariff year (R -13 million),
resulting in a residual claw-back of R1652 million. The return on the residual claw-back in
terms of the WACC rate for that period totals R133 million. The total residual claw-back for
2016/17 is therefore R1 785 million.
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The expected claw-back calculated for the 2017/18 FY is R11 million. A provisional claw-back
of R6 million, as well as the residual claw-back of R1 785 million for FY 2016/17, results in a
total claw-back of R1779 million in the 2018/19 tariff year. (Please note: Differences due to
rounding).
The claw back calculated includes an adjustment for actual taxation expense through the
calculation of the “equitable” tax rate as per section 6.5.
6.8. ETIMC
Table 5: ETIMC Calculation (R million)
Transaction type R million
2012/13 ETIMC retained 900 2012/13 WACC return on ETIMC (average ETIMC across year) 20 2013/14 ETIMC opening total 920 2013/14 Estimated ETIMC retained in 2013/14 1 378 2013/14 ETIMC closing total 2298 2013/14 Average ETIMC 1609 2013/14 WACC return on Average ETIMC 60 2013/14 ETIMC closing balance 2 358 2014/15 Average ETIMC 2 358 2014/15 WACC return on average ETIMC 108.3 2014/15 ETIMC closing balance 2 466 2015/16 ETIMC Utilised -150 2015/16 WACC Return on ETIMC 108.5 2016/17 WACC return on ETIMC 112 2016/17 ETIMC Total 2 537 2017/18 WACC Return on ETIMC 110 2017/18 ETIMC Utilised -681 2017/18 ETIMC Total 1 966 2018/19 WACC Return on ETIMC 147 2018/19 ETIMC retained 345
2018/19 ETIMC Total 2 458
The Ports Regulator regulates in the long-term interest of the industry. This requires that the
Ports Regulator not only confine itself to the immediate tariff decision, but also consider ways
to ease any future shocks or tariff spikes to the system which can be managed sustainably
within the space that is available for such intervention. The Ports Regulator considers it
prudent to continue to retain the Excessive Tariff Increase Margin Credit (ETIMC) inside of the
NPA through an adjustment to revenue allowed in the year it is either added to required
revenue or through a reduction in required revenue to offset against future large, but
justified, tariff increases resulting from the capital expenditure increases envisaged in the
NPAs Long Term Port Planning Framework but not as yet articulated to a level of detail and
phasing for accurate prediction.
Table 5 above sets out the calculation of the ETIMC and the resultant value at the end of the
tariff year.
It is important to note that the expected tariff increase for the outer years may or may not
require the use of the ETIMC facility through an adjustment of required revenue to ensure
tariffs are in line with the below inflation trajectory as set out in previous Records of Decision.
The ability of the NPA to implement their allowed CAPEX, maintenance and other operational
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expenses together with realised volumes may materially impact on the final tariffs and will be
taken into consideration by the Ports Regulator in outer years.
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7. Required Revenue and Tariff Increase
The application of the above amendments and adjustments to the NPA 2016/17 Tariff
Application has the following result:
Table 6: Assessment Results (R million)
Transaction Type R Million 2018/19
WACC Return 5134
Depreciation 2099
Operating Expenses 5938
Tax Expense 682
Claw Back -1779
ETIMC Added 345
NPA Required Revenue 2018/19 12419
Real Estate Business Income 3025
Required Revenue from Marine Tariffs 9394
Marine Business Income 9164
Total Estimated Revenue 12189
Revenue (Shortfall)/Surplus 2017/18 -230
The forecast calculates a revenue shortfall of R230 million translating into a tariff increase
requirement of 2.5%.
The marine business income that is forecast above is the current tariff book marine revenue
modelled for a weighted average revenue volume growth rate of 3.05% for all cargo types and
marine services for the period.
The following assumptions are included in the tariff assessment:
Risk Free Rate 8.35%
Market Risk Premium 5.3%
Gearing 0.5
Beta Coefficient (unlevered) 0.5
Revenue Effect of Volume growth 2018/19 3.05%
Inflation 5.4%
Whilst the NPA did request specific tariff increases in addition to the general adjusted tariff
increase of 8.45%, the application more specifically requested a 10% tariff increase in marine
charges to shipping lines, 9% increase in bulk exports, with coal and magnetite to increase by
10% and 8.45% on all other cargo dues the details of which are as follows:
“An average 10.00% increase for Marine Services tariffs applicable to shipping lines with:
Port Dues tariff to increase by 14.05%;
Berthing Services tariff to increase by 11.15%; and
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Other including Pilotage, Towage, VTS to increase by 7.04%.
An average 7.88% increase for cargo dues tariffs with:
FULL containers import and export tariffs to increase by 7.50%;
Automotive converted to unitary based tariff structure increasing by 5.00%;
Bulk tariffs increasing by 9.00% except:
Coal to increase by 10.00%; and
Ores and Minerals: Magnetite to increase by 10.00%.
Other cargo dues to increase by 8.45%.”
Based on the Ports Regulator’s own research, which raised significant concerns about specific
anomalies regarding tariff imbalances evident in the tariff book, as well as the cost levels
facing other users, and the impact that the recent depreciation of the South African Rand has
on costs, the Ports Regulator decided to approve the following specific changes applicable to
the tariffs as set out in the Tariff Book:
Marine services and related tariffs (Sections 1-8 of the Tariff Book, excluding Section
7 that deals with cargo dues) are to increase by 8.5%
coal export cargo dues that are to increase by 8.5%
container cargo dues are to increase by 0%
all RoRo tariffs are to increase by 0%
all other cargo dues are to increase by 5.4%. All break-bulk cargo dues are to be
capped at R100/ton.
In line with previous decision, all marine tariffs (Sections 1-8 of the Tariff Book, excluding
Section 7 that deals with cargo dues) for existing commercial South African flagged vessels as
well as commercial vessels registered in South Africa in 2016/17 will receive a 30% discount
applicable year on year up to 31 March 2019. Vessels registered in South Africa in 2017/18
will receive a 20% discount up to 31 March 2019 and similarly a vessel registered in 2018/19
will receive a 10% discount up to 31 March 2019. The discount will hereafter be reviewed.
Furthermore, in line with the Multi-Year Tariff Manual of March 2017, the Ports Regulator
projects that the indicative overall average tariff adjustment for the 2019/20 and 2020/21
tariff years will be within the 6% inflation target band. Due to the expected subdued economic
activity over the tariff period, despite some areas of optimism in cargo volumes, the Ports
Regulator will, if required, use the ETIMC to maintain overall average tariffs close to the
inflation target band, as defined by the South African Reserve Bank’s mandate.
Due to the ongoing Tariff Strategy implementation process and taking into consideration the
various comments of stakeholders, the Ports Regulator has determined that the specific
changes for certain commodities will be implemented. It is the Ports Regulator’s view that, in
due course, the comprehensive restructuring through the full implementation of the ten-year
Tariff Strategy more accurately deals with the price anomalies evident in the tariff structure
in order to further realign the Tariff Book.
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8. Tariff Strategy Implementation
The Tariff Strategy sets out guiding principles for setting the base tariff for different port users.
These guiding principles aim to introduce a more flexible approach to facilitating pricing in the
ports sector than what has been proposed earlier, in order to establish an appropriate level
of tariffs that better reflects the underlying costs based on use and benefit. These principles
are aimed at enforcing transparency and certainty.
The implementation of the Strategy and its principles are meant to bring real benefits to
customers through charging cost reflective tariffs. On that basis, those customer categories
currently over-charged would see tariffs reduced, whereas those categories that are currently
subsidized (under charged) would see their tariffs rebased to a fair level. These principles
must be taken into consideration during the gradual adjustment of the Tariff Book over the
period up to and beyond 2026/27.
In order to provide a continuous update of the implementation of the Tariff Strategy and the
changes to base tariffs due to changes in port structure, asset values and volume forecasts
etc., the Ports Regulator will publish updated base rates for the coming financial year in every
ROD. These tariffs provide an indication of the tariff trajectory during the estimated ten-year
implementation period in current terms. Over the implementation period, tariffs will thus
converge towards these annually updated base rates. For example, a dry bulk tariff above the
dry bulk base rate will gradually, as conditions allow, converge towards the R5.73 in today’s
prices.
Table 7:Tariff Strategy Base Rates
Tariff Strategy Updated Tariff Strategy “base
rate” 2018/19 ROD based NPA tariff book rate
Cargo Type Unit i.e. target tariff to be achieved
over ten year implementation Import Export
Break bulk R/Tons R 28.08 31.50 31.50
RoRo's R/m R 58.40 187.70 74.06
Liquid bulk R/Tons R 15,83 30.83 30.83
Dry bulk R/Tons R 5.73 7.40 7.40
Containers R/TEU R 184.97 2146 706
No distinction is made between inbound and outbound tariffs in the tariff strategy base rate
as any deviation from the base rate should clearly indicate whether a tariff rate is subsidising
other rates, i.e. above the base rate, or being subsidised, i.e. below the base rate. A new
category “Other” will be implemented in the Tariff Book for all commodity types at the base
rate.
9. Changes in Tariff design
As part of the process in simplifying the tariff design in the tariff book, the cargo dues tariff
for roro cargo has been changed to reflect a per meter rate, as opposed to the current per ton
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based tariff that was calculated as a rate per ton with every meter equals to 2 tons. The cost
reflective rate will also be published as a per meter rate.
10. Changes to the Tariff Book
The tariff application proposed a number of changes to the wording in the Tariff Book. These
proposals that were contained in Annexure G of the application (Pages 80 to 84), are
approved.
Weighted Efficiency gains from Operations (WEGO)
The Regulator is currently considering the submissions on the appropriate KPI’s to be included
in the WEGO calculations as per page 16 of the Tariff methodology. As the Regulator is of the
intention to commence measuring of the selected KPI’s in the 2018/19 tariff year, the
announcement on the specific KPI’s will be made through a ROD in due course.
11. Information and Reporting Requirements
11.1. Quarterly Reporting
The Ports Regulator continues to expand its monitoring role and as such requires quarterly
progress reports from the NPA (as per the Ports Regulator’s templates). Based on the
Provisions of Regulation 16, as well as Directive 22, the NPA is required to submit to the
Regulator the following:
11.1.1. All CAPEX projects (infrastructure and capital acquisitions) underway (to include, but not limited to, information pertaining to project stage, tender specifics, construction progress etc.);
11.1.2. All acquisition of land and other capital assets (including motivation thereof);
11.1.3. All disposal/or removal of land and assets (including motivation thereof);
11.1.4. Lease Register setting out all lease information;
11.1.5. Copies of all new agreements and licences entered into or issued in the quarter, as well as the supporting documentation thereof, including Sections 79s, 72s, 56s, 57s, and lease agreements (inclusive of all annexures, including but not limited to updated rentals and terminal operator tariffs);
11.1.6. All applicable B-BBEE certificates for the abovementioned licences and agreements;
11.1.7. Data, results and progress applicable to the implementation and monitoring of operator performance standards, as per TOPS/ MOPS/ ROPS/ HOPS;
11.1.8. Key performance indicators relating to port capacity, port performance, volumes and maintenance programmes per port.
All quarterly progress information must be submitted to the Ports Regulator by no later than
the end of the month after the end of the applicable quarter, based on the reporting
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templates provided to the NPA by the Ports Regulator on the 16th March 2016. The Ports
Regulator reserves the right to amend these on an ongoing basis.
The Ports Regulator remains bound by the confidentiality provisions of the Act.
11.2. Historical Information required
All NPA relevant annual debt stock levels as well as annual debt redemption payments
itemised, as well as the relevant debt instruments and applicable interest/coupon rates since
the inception of regulation.
All historical information referred to above, not yet submitted, must be submitted to the
Regulator by no later than the end of the first quarter of 2016/17. The Regulator remains
bound by the confidentiality provision of the National Ports Act.
11.3. Annual Financial Statements
As per current practice, a full set of annual financial statements must accompany all future
tariff applications to the Regulator. This must include a full set of segmental financial
statements of the Transnet Group.
Please note: All information as stipulated in Section 12 must be provided to the Regulator in
electronic format.
01 December 2017